Chart of the Week: How Climate Transition Spillover Risks Could Affect Barbados’s GDP

By Amanda Brown

Barbados Prime Minister Mia Mottley spoke at the opening of the 27^th United Nations Climate Conference (COP27), calling on powerful countries and institutions to commit to supporting climate vulnerable countries. From unlocking private sector finance to addressing loss and damage, Prime Minister Mottley highlighted the need to acknowledge and take action on the widespread impacts of climate change beyond reducing emissions alone. She has been championing the “Bridgetown Agenda,” which contains a suite of policy proposals to better equip the international financial architecture for tackling climate change.

Barbados, a climate vulnerable country in the Caribbean region, is highly exposed to climate risks. Beyond the physical risks from climate change, disorderly introduction of climate policies and regulations can result in significant transition risks. As a result of the introduction of climate policies by trading partners, defined as ‘transition spillover risk,’ or sudden domestic policy changes, Barbados could incur fiscal costs and impacts to its gross domestic product (GDP). When compounded together, these physical and transition risks may significantly affect the country’s economic well-being.

A recent technical paper by Régis Gourdel and Irene Monasterolo for the Task Force on Climate, Development and the International Monetary Fund assesses the macroeconomic, public finance and sovereign risk implications of both physical climate risks and transition spillover risks in Barbados. The Task Force is a collaboration of global experts utilizing rigorous, empirical research to advance a development-centered approach to climate change at the International Monetary Fund (IMF).

This Chart of the Week, Figure 15 from the technical paper, examines how a decrease in flight emissions from the tourism industry could shrink Barbados’ GDP by as much as 38 percent by 2050.

Figure 15 compares the impacts of several simulated scenarios on key macroeconomic indicators. The authors compare a baseline scenario in which current policies stay in place. This “business-as-usual” scenario would result in growth of carbon dioxide emissions until 2080, leading to about 3°C of warming and severe physical risks. The figure contrasts the impacts of current policies on GDP with the effects of “Below 2°C” and “Net-zero 2050” policies. In the “Below 2°C” scenario, climate policies would be gradually introduced starting immediately, resulting in a 67 percent chance of limiting global warming to below 2°C. The “Net-zero 2050” policy represents an ambitious scenario in which there is a 50 percent chance that global warming is limited to 1.5°C  by the end of the century through stringent and immediate climate policies.

The figure shows real GDP at different points in time relative to the three scenarios, both with and without spillover risk for the “Below 2°C” and “Net Zero 2050” scenarios. Notably, in comparison to the business-as-usual scenario, a reduction in tourism negatively affects the Barbadian real GDP in the two transition paths considered. Current policy spillover effects contribute to an increase in tourism, hence a higher GDP. Lower demand from tourism has both a direct and indirect negative impact on the Barbadian economy. The lower demand for tourism reduces the activity of the service sector, in turn decreasing its demand for labor, as well as government profits, followed by higher unemployment and lower government’s revenues, which would negatively affect the Barbadian economy. Due to this feedback effect, the difference between the spillover simulations and the no-spillover counterparts grows over the simulation period.

Based on analysis of these scenarios, the authors put forth several key findings. First, Barbados faces a potentially significant reduction in GDP due to transition spillover risk: up to 38 percent less in 2050, as a deviation from a business-as-usual path of tourism. A lower GDP, in turn, pushes up the debt-to-GDP ratio and weakens sovereign debt sustainability. Notably, spillover risk mostly affects the economic output of Barbados, with little change on the total emissions of the country. However, implementing domestic climate policies may decrease greenhouse gas emissions by up to 75 percent, with economic costs smaller than that of unabated climate change. In response, the authors suggest that climate policies should be implemented early while actively planning for potential disruptions of tourism revenues. Finally, mitigating climate risks would benefit from economic diversification and tailored financial instruments that support debt sustainability. These policies would work to counteract the potentially damaging impacts of transition spillover risk seen in Figure 15.

The impacts of decreased flight emissions on tourism and subsequent GDP decreases for Barbados demonstrate the importance of addressing transition spillover risks, given how closely linked livelihoods in the Global South are with the climate policies of advanced economies. The findings of this study echo Prime Minister Mottley’s call for a fundamental change in how more powerful countries and institutions address climate change, in that they must also underscore the need for effective climate financial tools to address the problem.

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